Introduction to Industry-Specific Challenges
All startups face challenges, but some industries experience a more specific subset of issues than others. Breweries (particularly larger breweries and sometimes midsize breweries) are at increased risk for failure due to market competition, difficulty accessing funding and other specific commercial relationship risks that can impact accounts receivable, access to inventory and movement of product. Additionally, like in every startup, breweries must be mindful of labor and employment matters, including how they categorize employees versus independent contractors, having employee policies and handbooks in place, and setting out clear duties at the commencement of the relationship with service-providers. This blog, however, focuses specifically on transactional issues for breweries and how to bolster your company’s contracts and transactional practices to mitigate commercial and other risks in this competitive landscape.
Essential Transactional Agreements for Breweries
Examples of transactional agreements that are important for breweries:
1. Ownership and Formation Documents
These documents are crucial for setting up the general structure of the business and ensuring that the business and business owners are property protected from elevated risks common to companies which do not have proper such structural agreements in place. These agreements must set out with clarity how the entity is owned and how it may operate, including the governance and control of the entity; voting matters; potential exit or sale matters; compliance matters and other key issues requiring approvals of the owners. Without this basic framework in place, a business is left too open-ended and disputes are likely to arise if the business parties do not prioritize this at the beginning of the business venture. Once a company becomes successful and time passes, memories fade, and disputes can often happen between even the best business partners if duties, capital contributions, ownership and control is not clearly set out from the start.
2. Intellectual Property and Brand Protection Agreements
It is also crucial at all steps of the way of a business to protect the brand and goodwill being built in the business. Not only should a business make sure it signs contracts with each of their service providers (employees, contractors, other business partners) around intellectual property, confidentiality and invention assignment, but the business should register and enforce its trademarks and protect its trade secrets, formulas, business know-how and similar proprietary interests. Further, in the event of the need to raise money or sell the company, investors and acquirers will want to know that every person who has contributed something of importance to the company has assigned the invention to the company or that the invention is a work for hire, in any case and in each case to be owned exclusively by the company. This includes confidential information and invention assignment agreements to be signed by founders, IP provisions in marketing agreements, IP licensing provisions in commercial agreements, protection of created artwork, logos, promotional and marketing materials, slogans, etc.
3. Commercial Leases
The importance of commercial leases to businesses in general is often underestimated. While commercial leases are typically relatively standard, on standard forms there are some important negotiable provisions that can make the difference between success and failure for a business or that can even reach individual pockets, putting the founder’s own livelihoods at risk (for example, if a founder personally guarantees the rent in a lease). Generally, it’s important to understand the negotiable points and pitfalls. Termination rights are critically important; compliance matters such as if there is a suspension or forfeiture of license to operate should allow for a termination of the lease; and provisions around rent increases, late fees and penalties should be watched carefully, as well as provisions around ownership of improvements and liabilities for conditions on or around the premises. These are only some of the issues to consider that are important in commercial lease agreements.
4. Equipment Purchase and Lease Agreements
It’s important to similarly understand your commercial equipment lease provisions or purchase agreements, including warranties, indemnities, payment structure, late fees, and termination rights.
5. Supply Agreements
Similarly, supply agreements are important to customize, as necessary and as possible to fit the particular business needs. Additionally, since it’s crucial to have access to necessary supplies and raw materials, parties should consider forecasts, estimates (quantity and frequency of materials needed), delivery provisions, cost provisions, non-conformity remedies, termination provisions, representations and warranties, indemnities and dispute resolution provisions.
6. Distribution Agreements
Distribution agreements for breweries are critical agreements. They are usually long-term relationships and the expectations, duties and remedies for breach must be clear and agreed and compliant with law. The brewery will desire some flexibility if product isn’t moving in the manner hoped for and the distributor will want a more locked-in commitment from the brewery since they invest in the distribution channels and infrastructure.
In these agreements it’s also critical to understand state laws, such as in Maine, the Certificate of Approval Holder and Maine Wholesale Licensee Act (the “Act”) and how such laws may impact term and termination provisions and the ability to sever the relationship (such laws can vastly limit the ability to terminate the relationship in favor of the distributor).
Other important considerations are transfer provisions, understanding what ‘good cause’ is for allowing for termination under state laws, exclusivity, and other matters. In Maine, under Section 1454 of the Act, “notwithstanding the terms, provisions or conditions of any agreement, no certificate of approval holder may amend, cancel, terminate or refuse to continue or renew any agreement, or cause a wholesale licensee to resign from an agreement, unless good cause can be established or proven for amendment, termination, cancellation, nonrenewal, noncontinuation or causing a resignation.”
“Good cause” in Maine does not include the sale or purchase of a certificate of approval holder but it does include (and is not limited to):
- a revocation of the wholesale licensee’s license to do business in the State;
- bankruptcy or insolvency of the wholesale licensee;
- assignment for the benefit of creditors or similar disposition of the assets of the wholesale licensee; and
- failure by the wholesale licensee to substantially comply without reasonable excuse or justification, with any reasonable and material requirement imposed upon the wholesale licensee by the certificate of approval holder.
This is absolutely crucial to know when getting into a relationship with a distributor in Maine, as a specified termination or end date in a contract will not, in most cases, prevail over this provision. For example, see Vacationland Distributors LLC v. Fore River Brewing Company, LLC, where despite the terms of a written contract with an end date for Vacationland Distributors’ services, the Act was determined to require good cause for termination or nonrenewal despite the agreement providing for it to expire by a specified end date.
State and federal laws in many cases will take precedence over what’s in the contract, so it is important to understand the legal framework and scope and address contracts accordingly. Another example of this in Maine is the state law that prohibits dual distributorship. Section 1453 of the Act provides that a certificate of approval holder that designates a sales territory for which a wholesale licensee is primarily responsible “may not enter into any agreement with any other wholesale licensee for the purpose of establishing an additional agreement for its brand or label in the same territory”. Additionally, the contact should be clear on what products are bound, whether future product lines will be extended to the agreement, how products should be stored (quality control, temperature, etc.), shipping matters, volume and stock matters, applicable territories, pricing, marketing strategy, brand protection, penalties for non-compliance, etc. Note that the Brewers Association also maintains a database of state laws related to trade laws, direct-to-consumer shipping, franchises and other laws that can be helpful.
Common Considerations in Brewery Agreements
Common important considerations and components of various agreements for breweries include, among other matters, the following:
- Clear expectations between parties setting up the relationship (duties, obligations, payment provisions);
- ABC and TTB regulations and compliance;
- State compliance;
- Term and termination provisions (and including with attention to beer distribution franchise statutes, specifically in Maine, the Certificate of Approval Holder and Maine Wholesale Licensee Act);
- Representations, warranties and indemnities;
- Insurance requirements;
- Risk of loss, transport, and shipping matters;
- Storage and quality control matters;
- Trademark, brand protection and licensing;
- Access to supplies and resources;
- Contractual remedies for breach;
- Force majeure provisions; and
- Dispute resolution provisions.
Conclusion
As you can see, contracts for breweries contain many important and complex terms and provisions and are important at various times in the life cycle of a brewery business. At Rogoway Law Group, we are ready and available to answer any questions you might have, to help you navigate these crucial business relationships and to assist your compliance with applicable laws.
